Beartooth Electric Cooperative is seeking to void its amended wholesale power contract with its bankrupt supplier.
In a complaint filed Friday in U.S. Bankruptcy Court, Beartooth, based in Red Lodge, is asking the judge hearing the case of Southern Montana Electric Generation and Transmission Cooperative to declare its contract with Southern null and void.
"After reviewing our contract with Southern and the surprising obligations that were added in 2008, the board was alarmed by the serious risk to the financial security of our cooperative. On advice of counsel, we are seeking to put that contract aside," said Roxy Melton, Beartooth's chairwoman.
Southern is a Billings-based wholesale co-op that provides electricity mostly to its members, which include five rural co-ops and the city of Great Falls. The other co-ops are Yellowstone Valley, Fergus, Tongue River and Mid-Yellowstone.
Southern, which filed for bankruptcy last October, also borrowed $85 million in 2010 to build the Highwood Generating Station, a 40-megawatt natural gas plant near Great Falls. At the time it went broke, Southern was seeking to borrow up to an additional $215 million to expand the plant to 120 megawatts.
Since the bankruptcy filing, Beartooth had its attorneys review its contract with Southern because "many of us felt it was just a bad contract," said Arleen Boyd, a Beartooth board member and Beartooth's representative on Southern's board.
"We, as part of the bankruptcy, are going to be apparently held responsible for the Highwood debt and our contracts are collateral on that debt," Boyd said.
Southern pledged Beartooth's wholesale contract, along with its contracts with Fergus, Tongue River, Mid-Yellowstone and Great Falls, as security for the initial Highwood loan. Yellowstone Valley's contract was not part of the loan agreement.
Beartooth's contract, Boyd said, obligates it to cover all of Southern's debt even if the wholesaler ceases to exist. Pledging Beartooth's contract as collateral for the Highwood loan also means that the contract and the obligation to buy power may be assigned to a future creditor through the bankruptcy, she said.
Beartooth's complaint, filed by attorney Martin Smith of Billings, cited several reasons for voiding the contract.
The amended contract, which is a guarantee of Southern's long-term debt, was not approved by the Wyoming Public Service Commission, the court records said. The Wyoming PSC must approve all guarantees of long-term debt for Beartooth, which serves some Wyoming customers. Beartooth cannot find evidence that the Wyoming PSC approved the contract, Boyd said.
Beartooth maintains that its contract cannot be assumed or assigned as security without Southern first getting a valuation on the contract and Beartooth's written consent. Neither was done, Boyd said.
"We're saying unless we signed on that and gave permission, our contract shouldn't have been assigned or assumed by Southern," Boyd said.
Beartooth also says its contract may not be assumed by the bankruptcy trustee.
Another issue stems from amendments in 2008 to the 2007 contract. Both contracts obligated Beartooth to take power from Southern until 2048. But the amendments added "onerous obligations" to cover Southern's debt and waived some of BEC's rights while Southern did not give up any rights or take on more obligations, Boyd said.
The amended contract is void because it is one-sided and violates basic principles of contract law, Boyd said.